Chong-En Bai - Institutional Foundations of China's Growth

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Slides from a roundtable on "The Wealth of Nations in the 21st Century," organized by the Barcelona Graduate School of Economics and FemCat Foundation.

Chong-En Bai (Tsinghua University) is a member of the Barcelona GSE Scientific Council. Read about the Scientific Council: http://j.mp/1hXEm6L

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Chong-En Bai - Institutional Foundations of China's Growth

  1. 1. Institutional Foundations of China’s Growth Chong-En Bai Tsinghua University Chang-Tai Hsieh and Zheng Song University of Chicago
  2. 2. Acemoglu and Robinson: “Why Nations Fail” Jiangsu Tieben Iron and Steel (from Richard McGregor of the Financial Times) Private company supported by local government of Changzhou "As a low cost producer, he thought he could easily grab a profitable market share away from the relatively pampered state-owned giants like Baosteel, 150 kilometres away down the Yangtze, near Shanghai."
  3. 3. Started to build in 2003, but stopped in March 2004. CEO (Dai Guofang) arrested and spent five years in jail. Conclusion: China is no different from other failed states? Vested interests protected; entrepreneurs are blocked?
  4. 4. World Bank Doing Business Indicators "Ease of Doing Business" (2013 edition) China: 91 (just above Guatemala and Zambia) Tunisia 50, Kazakhstan 49, Mongolia 76 Starting a business 151 Dealing with construction permits 181 Getting electricity 114 Getting credit 70 Protecting investors 100 Paying taxes 122
  5. 5. Aluminum Market in China Chinalco dominated aluminum market until 2008 Chinalco was given the mining rights over most of the bauxite in the country by the central government Bauxite deposits in Sanmenxia Prefecture in Western Henan Province
  6. 6. East Hope Group Large private company Started in 1982 in rural Sichuan Province selling quail eggs. Later expanded to pig feed CEO Liu Yongxing: Currently sixth richest person in China (net worth US$ 7 billion)
  7. 7. Decided to go into Aluminum Liu Yongxing: "Make sure my company did not become the next Tieben. Tieben is a lesson for us all. It was a tragedy." East Hope cut a deal with Party Secretary of Sanmenxia Chinalco fought East Hope Group every step of the way Chinalco’s market share dropped by 98% in 2005 to 50% by 2008.
  8. 8. Why was East Hope able to do it? Private Money (did not depend on state owned banks) Tap into interests of local government East Hope CEO: "Forgive me for being frank, but local officials, even corrupt ones, all need to have political achievements."
  9. 9. Chery-Wuhu (Wuhu, Anhui Province) Started by engineers at First Auto Work ("Red Flag" sedan) Approached by Wuhu Party Secretary in 1996 Party Secretary of Wuhu: "You let me take care of the licenses and land; you just focus on getting some cars built here." Bought and shipped assembly plant in Spain (SEAT) First car was a clone of VW Jetta Second car was clone of Chevrolet Spark (clone of Daewoo Matiz)
  10. 10. Chery-Wuhu Legally registered as state owned firm (Wuhu local government holds majority stake) Is it really a state owned firm? Party Secretary of Wuhu promoted to Vice Party Secretary of Anhui Province
  11. 11. Tencent What’s All The Fuss About WhatsApp? China’s WeChat Is a Worthy Rival (Time, Feb. 21, 2014) Hannah Beech @hkbeech Feb. 21, 2014 WeChat is expected to bring in 6.8 billion yuan ($1.1 billion) this year and about 40% more in 2015. According to estimates by Nomura, WeChat’s average revenue per user is $7 per user, compared to $1 per user on WhatsApp. And investors seem to appreciate the extra cash flow: analysts at Barclays estimate that WeChat is valued at about $30 billion as a standalone business, or about $95 per user, easily exceeding the $19 billion and $45 per user that Facebook paid for WhatsApp.
  12. 12. March 31, 2013, Minister of Industry and Information Technology said that WeChat may have to charge consumers for the usage. On the same day, Tencent told Xinhua News Agency that WeChat would certainly not charge any fee from consumers of the basic service. On April 4, a survey of consumers found that 90% of the WeChat users said they would stop using WeChat if they were charged a fee.
  13. 13. Renmin Search Engine June 2010, test version launched September 2010, Deng Yaping, a former world number one pingpong player was appointed the general manager November 2013, the search engine stopped its service
  14. 14. Take-aways: Formal property right protection is poor Businesses face many difficulties: approval, land, financing Local governments can help and state capacity matters Competition among local governments De facto protection The assets of some businesses will lose much of their value if transferred All these alternatives to formal institutions have their limitations
  15. 15. Postscript After spending four and half years in prison, Dai Guofang started a new nickel-iron alloy business in a different city of the same province. It is now the largest producer of nickel-iron alloy in China.
  16. 16. Thank you!

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